Guest Post: PayFac Alternatives – Practical Ways to Increase Margins & Save Customers Money

By Mark Passifione, VP of Strategic Partnerships, Clearent

The popularity of the PayFac model has exploded in recent years, and the reason for this is clear. SaaS providers are heavily focused on increasing the value of their software by monetizing payments and creating more recurring revenue.

VALUE OF INTEGRATED PAYMENTS
One of the best ways to drive value is by embedding payments technology directly into the software. Not only does it create a more seamless payment experience, but it also eliminates manual reconciliation and reduces PCI scope for software customers, all while putting more money back in the software company’s pocket.

Some providers take this a step further and become a registered Payment Facilitator, also known as a PayFac or merchant aggregator. Under the PayFac model, the SaaS provider acts as a “master merchant,” boarding each of their customers underneath their merchant account as “sub-merchants,” thereby simplifying the new account enrollment process and allowing the SaaS provider to control the flow of funds. This model is well known for providing for the greatest returns, but it also comes with increased risk, more regulatory requirements, increased fees, and higher overhead costs. So while the PayFac model has the highest revenue potential, it also has the greatest cost, as you will see in this infographic.

PAYMENT FACILITATION: PROS & CONS
When you become a PayFac, you assume responsibility for paying your merchants directly, which means you become subject to PCI compliance and the stricter verification and security requirements that come with it. You also take on underwriting, risk and compliance and have to hire a team of people to manage the various functional areas of a payments program and drive attachment rates while managing risk.

While the PayFac model helps businesses quickly sign up for credit card processing without having to apply for a traditional merchant account, there are other ways SaaS providers can streamline the onboarding process. Take for example a Boarding API, which allows them to create a custom workflow that best matches their new account setup process and collect data using their own interface. It can also help reduce application processing times by automating underwriting, pricing and equipment setup, which in the end helps their customers accept payments faster.

OTHER PARTNERSHIP PROGRAMS TO CONSIDER
Before deciding to become a PayFac, it’s critical that SaaS companies closely evaluate all partnership models that can help them monetize payments. While the amount of revenue generated is obviously a top priority, choosing the right program ultimately comes down to two things that are critical to supporting a payments program: time and resources. Let’s take a look at a few examples.

Referral Programs
Referral programs are very common because they require the least amount of investment from the SaaS provider in terms of headcount, infrastructure and risk and leverage the processing partner for the entire payments sales and support cycle. Since the processor or acquirer does most of the heavy lifting in terms of sales and service, the referral model offers strong revenue potential, but not to the extent of the ISO/ISA or PayFac models.

ISO/ISA Model
In addition to building an integration, these programs require greater responsibility, resources and infrastructure but in turn offer greater control of the payments lifecycle and more revenue. For example, the ISA (Independent Sales Agent) would likely handle the sales process from end to end and would offer some level of support to their merchants. Taking on the sales and support responsibility typically shifts the economics further in the SaaS provider’s favor and delivers the opportunity to earn more margin than they would in a referral model.

Registered ISOs (Independent Sales Organizations) operate in a similar manner but do require some investment in terms of registration costs, sponsor bank fees and potentially bearing some risk on their portfolios. ISOs have the added benefit of being able to white label the solution, which gives them more control over the merchant onboarding experience. They also have the potential of negotiating portability clauses, giving them true ownership of their portfolios and residual streams which can be used as collateral in securing a loan, or perhaps sold entirely in the future.

Hybrid PayFac
We’ve discussed the popularity of the PayFac model, highlighting the financial upside as well as the associated investment and risk. The Hybrid PayFac model, on the other hand, delivers many of the components typically associated with a full Payment Facilitator, but without the investment and risk. Hybrid PayFacs have the opportunity to earn generous residuals but don’t have to worry about the significant startup and ongoing operational costs that we mentioned earlier because they leverage their processing partner’s platform and infrastructure. This model also reduces the exposure to risk because the processing partner serves as the merchant of record, instead of the SaaS provider taking on this role.

The use of a Boarding API is a key component of these programs because it enables instant onboarding and reduces friction during the enrollment process, ensuring that the SaaS provider has strong adoption rates for their payments solution. There’s also the added benefit of the data that’s captured during the onboarding process, which can be used to guide upsell and cross-sell campaigns in the future and drive more recurring revenue.

DETERMINING THE BEST PATH FOR YOUR BUSINESS
When discussing partnership models, it’s important to keep flexibility top of mind and know that it’s ok to walk before you run. Before SaaS providers lock in on becoming a registered PayFac, it’s critical that they dive deeper and select a program that aligns with their core objectives, tolerance for risk and how much investment and effort they are willing to put into a payments program. Discuss these areas one by one with your processing partner and they will be able to help you determine which program is best for your business.

If you have questions about the PayFac model and how to use payments to make your software more attractive, we invite you to check out our free ISV Quick Guide.

Clearent is a full-service payment solutions provider that helps small- and medium-sized businesses securely accept payments through its proprietary, omnichannel platform. Independent software vendors (ISVs) and sales offices (ISOs) are empowered to manage and monetize payments through Clearent’s partnership programs, which deliver tailored payment solutions, proven go-to-market strategies, and power portfolio management technologies to the partner. Headquartered in St. Louis, Clearent processes $20 billion in electronic payments each year and currently serves more than 800 channel partners and 55,000 merchants. To learn more, visit clearent.com.